Financial Risk Management

Any entrepreneurial activity is targeted at generation of maximum income from business, with minimum expenses. No company is safe from the risk of losses and no profit. Exposure to the risk of losses will depend on the nature of business.

Risks are classified as follows:

• material;
• financial;
• labor.

It is possible to avoid risks only if one refuses to carry out the projected activities. Management of entrepreneurial activities should follow the manner which would give the best chance of successful outcome. Entrepreneurs whose activities are associated with risks cannot be satisfied if they have to refuse from potential gain. Risk management implies drastic measures to reduce the exposure level of a particular risk.

Types of financial risks

A company using of services of financial institutions, such as banks, insurers and investment exchanges, is exposed to risks of inflation, growth of discount rates at banks, significant devaluation of securities.

Classification of financial risks:

• financial risks associated with capital investments;
• risks that depend on the purchasing power of money (inflation, currency risks).

In the case of inflation, a company incurs significant losses associated with devaluation of money. Inflation always implies price increase which results in the reduction of cash revenues and even zero income. Exchange rate fluctuations during lending transactions and other economic transactions entail exchange losses.
The risks of capital investments include income reduction, substantial financial losses and lost profit. With complete lost of incomes and unreasonable investments, an entrepreneur may face bankruptcy risk. The company will stop functioning as an income-gaining entity.

Finance management system

According to the degree of risk, different financial mechanisms can be applied to mitigate risk situations or exclude them completely. Risk management is one of the elements in the financial risk management structure. It is based on the right strategy and tactics elaborated for each particular situation. The end target of financial risk management is to reduce the degree and scope of risk and to ensure maximum profit and income from any business transaction.

Smart management of financial risks will minimize risk exposure and protect the company from potential losses and adverse effects. Entrepreneurs create a special loss reserve fund which protects a company from large losses and bankruptcy.

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